Let’s Make A Deal

The value of deals announced year to date is a record amount. As of this week, mergers worth over $1.5 trillion are pending or closed. As of the end of the first quarter, purchasers announced over $1 trillion worth of deals. This amount compares to $940 billion during the Dot Com craze and an average of half a billion in transactions over the past 22 years.

This amount might surprise you. The number of deals announced is less than last year but the gigantic size of these deals is setting the record books on fire.

You would have to go back to America Online’s ill-fated $112 billion purchase of Time Warner in 2000 to find a merger bigger than today’s deals.

More recent giant deals appeared in the past few weeks. Walmart (NYSE: WMT) announced its intention of merging its U.K. supermarket Asda with J Sainsbury (OTC: JSAIY). Look no further than Sainsbury’s CEO Mike Coupe’s rendition of “We’re In the Money,” which he was caught singing on television, for a sign of the glee felt by acquisition targets.

With global demand rising, national unemployment at record lows, and interest rates heading up, having some financial heft can help a company navigate choppy waters.

This trend has been evident in many of the food stocks, where I’ve been quite bearish. After years of scooping up smaller high growth organic companies, the more significant food conglomerates have been stretching to find bigger and bigger deals.

Something Was Missing

Back in 2014, General Mills (NYSE: GIS) purchased Annie’s Inc., the maker of bunny shaped organic pasta for $814 million. Annie’s business at the time generated $204 million of revenue and had a long runway available for product line extensions. Go to any grocery store now, and you’ll see Annie’s crackers, cookies, and gummy candies. More importantly, the deal almost doubled the size of General Mills’ organic food portfolio.

Fast forward to today’s deal environment, and General Mills paid ten times the value of the Annie’s deal, or $8 billion, for Blue Buffalo pet food. The deal equaled a multiple of almost seven times revenue for a product with less opportunity for additional products versus four times for the Annie’s deal.

What does this mean for the stock market? For the overall market, it’s a bullish sign. Not only that companies are willing to execute deals, but also for the dollars awarded to shareholders that will flow back into the market. Many of the deals announced are cash deals, so those dollars flowing back into the market will have to find a new home.

As for the acquirers, I’ll be analyzing their debt loads and how much flexibility they have to make these high priced deals work. Those that look like they’ve got themselves in a corner might get a bearish recommendation.

I’ve never been a fan of trying to pinpoint the next big target and hoping a buyer comes along. I’d rather sit back and dissect the implications once the deals close.

But my colleague at Investing Daily, Jim Fink, has a long history of delivering triple-digit gains to investors via his Velocity Trader product. The trade ideas are not all deal related, but they do deliver significant returns.

You might also enjoy…

Obscure Tax Law Forces This Company to Pay Out 90% of its Profits

A 50-year-old loophole is forcing one company to pay out $9 of every $10 it makes from ironclad contracts with the U.S. Government.

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About The Author

Linda McDonough is a veteran hedge fund analyst who loves to break down company financial statements and identify market inefficiencies to uncover big opportunities. She believes in a boots-on-the-ground approach that includes surveying customers, interviewing company executives, or doing whatever it takes to see what others don't.

She's now brought her experience as a hedge fund analyst to subscribers of her Profit Catalyst Alert service. Her system identifies small- and mid-cap stocks that are about to move due to catalytic events that few others can identify...until it's too late. These events often times result in massive gains for her followers.

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